Moody's downgrades SBI, HDFC Bank after sovereign rating cut, explained

What is Moody's view on SBI?

In the case of SBI, Moody's expects the bank's asset quality and profitability to weaken, which could hurt its capitalisation. As a result, Moody's has placed bank's ba1 BCA under a review for downgrade. A downgrade of SBI's BCA would also result in the downgrade of SBI's foreign currency subordinate MTN programme rating that applies to the Basel III compliant Additional Tier 1 securities and other junior securities.

What is the comment on HDFC Bank?

Similarly, for HDFC Bank, Moody's has downgraded its BCA to baa3 from baa2 given the strong linkages between the bank and the sovereign, including its large direct exposure to government debt and exposure to common underlying operating conditions. Moody's has also downgraded HDFC Bank's long-term deposit ratings to Baa3 from Baa2 reflecting the downgrade of the sovereign rating.

Should investors be worried?

As mentioned above, these rating views are largely on account of sovereign rating downgrade. In their note on sovereign rating downgrade, Moody's had highlighted rising stress in the financial system, pressure on asset quality of banks and non-banks, among other issues. Prolonged slowdown in the economy could hamper the financial system, said Moody's. So, these rating actions are not surprising.

View on other banks

Besides SBI and HDFC Bank, has downgraded the long-term issuer ratings of Exim bank. Also, the agency has placed the long-term local and foreign currency deposit ratings of Bank of Baroda, Bank of India, Canara Bank and Union Bank of India under review for downgrade. Similarly, it has downgraded IndusInd bank’s long-term local and foreign currency deposit ratings. Further, Moody's has also affirmed PNB's long-term local and foreign currency deposit ratings. The rating outlook of Punjab National Bank is changed to stable from positive. And finally, in the case of Central Bank of India and Indian Overseas Bank, Moody's has affirmed their long-term local and foreign currency deposit ratings.

Moody’s view on impact of COVID-19 outbreak

Moody's noted that the Indian banking sector has been affected given the disruptions to India's economic activity from the coronavirus outbreak, which is weakening borrowers' credit profiles. Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Disruptions from the coronavirus outbreak will worsen the economic slowdown in India that has been underway in the past year and will accelerate a deterioration in the banks' asset quality and profitability.

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What does it think about stimulus measures from RBI and government?

Stimulus measures announced by the Indian government and the RBI since the start of the outbreak will help mitigate some of the credit pressures, Moody’s said. But the longer and broader the economic slowdown, the more these banks will face asset quality and profitability issues. At the same time, heightened liquidity stress at non-bank financial institutions will pose a risk to the stability of the broad financial system, given banks' large direct exposures to these entities.

What is the outlook on PSU banks?

In the absence of external capital support from the Indian government, Moody's expects the capitalisation of the PSBs to deteriorate. Despite the near-term asset quality, profitability and capital strain, Moody's expects their funding and liquidity to remain a key credit strength.

What is its view on private banks?

For the private sector banks covered in this rating action, in Moody's opinion, their asset quality and profitability will also deteriorate driven by rising loan delinquencies and defaults due to the coronavirus outbreak, which will result in an increase in credit costs. However, most rated private sector banks have better loss absorbing capacity compared with PSBs because of stronger capitalisation and loan loss reserves, it said.

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Is there a chance of upgrade in near future?

Given the negative outlook, EXIM India, HDFC Bank and SBI's ratings are unlikely to be upgraded in the next 12-18 months, Moody’s said. Nevertheless, the rating outlook could be changed to stable if India's rating outlook is stabilised.